Nvidia, whose products include the chipsets used in Microsoft Corp.'s Xbox game machines, has entered into a multi-year agreement for IBM to make its next-generation GeForce GPUs on 0.13-micron technology.

This would be the first time that Nvidia will use a second foundry source in addition to TSMC, which has provided services to the Santa Clara, Calif., fabless company for five years. A Nvidia spokesman said IBM's innovative legacy of technology "firsts" has strong appeal, along with its technical expertise.

"One thing that separates IBM from TSMC is that we'll get access to services usually reserved for IBM's special customers, mostly technical and design services, as well as IBM's engineering resources," the Nvidia spokesman said. "TSMC is not doing anything wrong, but more is always better."

"Our strength is that we have advanced process technologies that nobody else has," said an IBM spokesman. "We were the first to offer silicon-on-insulator, silicon germanium, copper interconnects, and low-k dielectrics."

Nvidia's main motivation for switching to a dual-foundry strategy is to minimize risk, analysts said. Nvidia denied speculation that it is not satisfied with TSMC's 0.13-micron technology yield rates. But ana-

lysts said that because Nvidia does not want to see its high-end products coming to market later than planned, it doesn't want to bet on only one horse.

"It took TSMC a long time to develop the 0.13-micron process. I frankly think Nvidia is concerned that if they stay with TSMC, they won't get product based on 65nm technology out before their competition," said Len Jelinek, an analyst at iSuppli Corp., El Segundo, Calif. "Now that IBM has entered into the foundry race, Nvidia is going with who they see as the technology leader."

According to industry sources in Taiwan, TSMC's yield rate at 0.13 micron was as low as 45% in the fourth quarter of 2002, compared with an average industry norm for all process technologies of more than 90%. The foundry improved the rate to about 60% this quarter, the sources said.

TSMC chairman Morris Chang said in a statement that his company has shipped more than 200 million graphics and media communications processors to Nvidia over the last five years, and that TSMC will continue to be Nvidia's primary foundry.

Still, some analysts view the alliance between IBM and Nvidia, one of TSMC's top 10 customers, as a potentially painful blow.

"Now the question becomes, what does the partnership between Nvidia and IBM do to TSMC's volume in 2005 when 65nm technology is expected to ramp," Jelinek said. "They've got to find a partner to fill that capacity, and there aren't many who can."

IBM will be the sole manufacturing source for the new GeForce chip Nvidia is developing. All Nvidia designs running at TSMC will stay at the Taiwan foundry, said the Nvidia spokesman, adding that it's too early to tell whether having two foundry sources will affect chip pricing.

Securing a major customer like Nvidia for its foundry services is a significant victory for IBM, East Fishkill, N.Y. "This is nice momentum for us, because Nvidia is the second-largest fabless chip company in the world," the IBM spokesman said.

The alliance between Nvidia and Big Blue could signify a trend of fabless companies expressing a preference for integrated device manufacturers over foundries, analysts said.

"IDMs could be a better choice for fabless companies, since their high-end process technologies are the most advanced," said Chris Hsieh, a research vice president at ING Baring Securities (Hong Kong) Ltd. in Taipei.

Last year, Xilinx Inc., which for years had relied exclusively for its advanced FPGAs on TSMC's main foundry rival, United Microelectronics Corp., announced an agreement under which IBM will make FPGAs for Xilinx using IBM's advanced 130- and 90nm technologies.

IBM also has foundry agreements with several of the top fabless IC companies, including Qualcomm, the company spokesman said.